FDC Whispers – October 20, 2023

Dear Subscriber,

Lifting of the forex ban on 43 items and the plunging naira (N1,180/$)

Nigeria made some audacious policy statements in June 2023, including the goal of exchange rate unification. As a follow-up to this policy, the CBN finally lifted the FX restriction on 43 items. Analysts have mixed views as to the impact of the lifting of the forex ban. Some are of the opinion that it will help stabilize the naira in the forex market, whilst others believe that the naira is in a free fall. The reality is that the Nigerian forex market is disequilibrated as a result of market structure and policy misalignment. It is our view that the naira will gravitate towards its fair value in the near term (2024). But until then, there will be gyrations and uncontrollable swings.

Nigeria’s forex inflows remain constrained

Average daily forex liquidity in the Nigerian Autonomous Foreign Exchange Market (NAFEM) dropped 22.49% to $101.37 million in October 2023 from $130.78 million in Q2’23. This quandary deepens as Nigeria’s external reserves continue to fall ($33.24bn), even with oil prices surging ($93.52pb). Although Nigeria’s oil production is still below its OPEC quota (1.83 mbpd), it picked up again in September (1.35 mbpd). However, the inflow of dollars remains limited due to policy uncertainty and lingering security issues. In Q2’23, capital importation declined by 33.12% to $1.03bn from $1.54bn in Q2’22.

Riding the rails to transport inflation relief

Rising inflation in Nigeria (26.72% as of September) is primarily driven by currency depreciation, higher food prices, and elevated energy costs. With diesel and PMS prices peaking at N1,030/litre and N617/litre, transportation costs have soared to new heights. In September, transportation inflation skyrocketed by 27.2% compared to 27.1% in August, making road travel affordability a looming problem for Nigerians. To tackle this issue head-on, Nigeria needs to invest in rail infrastructure as a cheaper and more cost-effective alternative for individuals and businesses.

In this latest edition of FDC Whispers, the Think Tank embarks on an in-depth exploration of recent economic shifts within Nigeria’s money, equities, forex, and commodities markets, shedding light on what lies ahead in the weeks to come.

Enjoy your read!